Best Sector ETF Bets for the New Year

By MoneyShow.com  DEC 10, 2012 11:30 AM

As we head into the end of the year, Moneyshow's Tom Aspray reviews the year's top performing sectors and looks at the current technical readings to spot the best sectors for new investing.

 


Last week’s action in the Dow Industrials (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX) was positive but as I noted in Friday’s Week Ahead market review, even higher prices and very strong readings from the market internals are needed to signal upward acceleration.

The importance of sector selection was emphasized last week because while the Spyder Trust (NYSEARCA:SPY) gained just 0.2%, the Select Sector SPDR Financial (NYSEARCA:XLF) was up an impressive 1.7%. On the downside, the Select Sector SPDR Materials (NYSEARCA:XLB) dropped 1.8% for the week.


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So far in 2012, two of the sectors are up over 20% with the Select Sector SPDR Financial gaining 23.2% and was closely followed by the Select Sector SPDR Consumer Discretionary (NYSEARCA:XLY), which is up 21.5%. Both have sharply outpaced the 12.8% gain in the Spyder Trust.

The fourth quarter drop of 6.7% has cut into the performance of the Select Sector SPDR Technology (NYSEARCA:XLK) as it is now up just 13% for the year. At the September highs, XLK was up 23%.

Using the multiple time frame relative performance analysis, one can identify those outperforming sectors as well as which sectors have the best potential as we head into 2013.
 


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Chart Analysis: Last week’s nice gain by the Select Sector SPDR Financial was helped by the upside breakout in Bank of America (NYSE:BAC), which is over a 5% holding in XLF. The Select Sector SPDR Consumer Discretionary peaked in September at $48.01 and then dropped to a low of $44.66. This was a classical Fibonacci retracement as the correction held just below the 50% support at $44.72.


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The Select Sector SPDR Health Care (NYSEARCA:XLV) has been a favorite sector for most of the year as it has been up every quarter and currently shows a 16.7% gain for the year. The correction in November held above the 50% retracement support.

The bullish action of the weekly chart of the Select Sector SPDR Industrials (NYSEARCA:XLI) was discussed last Friday as it suggested that a major bottom has been completed.

What it Means: Of the four sectors, the Select Sector SPDR Consumer Discretionary is probably the most vulnerable to a sharp correction given the fragile nature of the consumer. The sharp drop in the preliminary consumer sentiment reading last Friday is a short-term negative.

For new positions, the Select Sector SPDR Financial and Select Sector SPDR Industrials look the best.

How to Profit: Those not already long XLF could go 50% long the Select Sector SPDR Financial at $15.92 and 50% long at $15.68, with a stop at $15.29 (risk of approx. 3.2%).

For the Select Sector SPDR Industrials, go 50% long at $37.02 and 50% long at $36.73, with a stop at $35.38 (risk of approximately 4%).

For the Select Sector SPDR Health Care, go 50% long at $40.04 and 50% long at $39.76, with a stop at $38.42 (risk of approximately 3.8%).

For the Select Sector SPDR Consumer Discretionary, go 50% long at $46.88 and 50% long at $46.26, with a stop at $44.42 (risk of approximately 4.6%).

Portfolio Update: Investors should be long the Select Sector SPDR Financial at $14.40, with a stop at $14.77.

You should also be long the Select Sector SPDR Health Care at $36.14, with a stop at $38.42.

Editor's Note: This article was written by Tom Aspray of MoneyShow.

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